Is Bitcoin real money?

I’ve been asked this question so often that I’m compelled to include it here: is Bitcoin real money?

Here’s my short answer: yes. You can cash Bitcoin (BTC) out for USD or other fiat currencies easily, there are a number of online exchanges that can be used or there may even be a Bitcoin ATM in your area. There’s also a growing body of merchants that accept BTC directly as payment, just google ‘who accepts bitcoin payment’ and you’ll be treated to lists of vendors that see its value.

So that’s my short answer, but let’s take a deeper look at the question and explore a deeper answer.

Real money.

Just what do you consider real money? US Dollars, perhaps? Isn’t the question about BTC’s “real money” status more a question of where does Bitcoin’s value come from?

So let’s look at that. But first it might be helpful to take a look at what came before, like where does the US Dollar’s value come from? The US Dollar used to be backed by gold, this was called the gold standard, up until the 1970’s when it was decided that there’d be no more gold standard. Today the USD is backed by debt, essentially.

Moving back from USD for just a moment, let’s look at gold- where the USD used to pull its value from. I know some people, acquaintances, who buy up gold and keep it stashed just in case of some sort of cataclysmic event. If civilization as we know it were to suddenly collapse, as in suddenly the biggest and most immediate concern for 98% of us has become where our next meal is coming from or finding a source of clean water, I can’t see gold having any value in this hypothetical world- especially if re-establishing civilization wasn’t anywhere on the horizon. In a purely utilitarian philosophy/society, gold is almost worthless. You can’t eat gold, gold won’t keep you warm at night, you can’t use it as a fertilizer or a fuel, you wouldn’t even be able to make decent weapons or tools out of it because it’s too damn soft. Things that would be valuable would be antibiotics/medical supplies, tools, weapons, fuel, blankets, etc.

But in our world today, gold has quite a bit of value. Why? Why does the USD have any value?

Both these things have value simply because we’re all in agreement that they have value. Perception creating reality. Same way a king has power over a nation. If one day everyone in a kingdom decided that they’d no longer obey the king – as in all the king’s personal guards and servants to the military to the commoners, everyone – the king would no longer be a king, would they?

Bit of a philosophical tangent just then, so back to the subject at hand: Bitcoin. Where does its value come from?

There are three big things to consider in a currency regarding its value. They are supply, liquidity and adoption.

Supply is defined by how much of this currency exists, as in how rare or how common is it?

Liquidity can be explained by “how easy is it to chop this up into pieces and use those pieces as a medium of exchange?” So a house is not a very liquid asset, cash is a very liquid asset.

Adoption is simply asking “what are the chances this [random party/person] would be willing to receive this as payment?”

Let’s compare USD and Bitcoin and see where each falls on those three indicators.

In regards to supply: Bitcoin beats USD. Bitcoin, unlike USD, has a maximum supply of 21 million Bitcoins. It’s impossible for more than 21 million Bitcoins to ever be in circulation simultaneously. The US Federal Reserve controls the supply of USD, the Federal Reserve is a private bank and their meetings are closed. Cheng Siwei, the late Chinese politician, was in the news in recent years expressing Beijing’s alarm that the Federal Reserve had been ‘printing money’ to buy Treasury debt. A policy like this would create a sort of rebound inflation, surplus USD created to be spent internationally wouldn’t have the same immediate reaction on inflation that surplus USD used domestically would, but it would catch up once those international holders of that surplus USD decided to use it for payments to US merchants. Regardless if the Fed does print money like that or not, due to inflation your USD loses, on average, 2% of its value annually.

In regards to liquidity: Bitcoin again beats USD. Bitcoin/cryptocurrency is the most liquid asset that the world has ever seen. Bitcoin’s price right now is about $2350 per Bitcoin, this doesn’t mean that you need $2350 on hand today to own some Bitcoin, you can just buy $20 worth of Bitcoin if you want and get 0.008515 BTC at the $2350 trading price. One cent USD is 0.00000426 BTC. So if you sent someone 0.00000213 BTC right now then you’d be sending them half a cent USD. So it’s more liquid than USD.

In regards to adoption: USD beats Bitcoin, for now. Bitcoin has many advantages over USD and all other fiat currencies so as time goes on and more people around the world begin to understand and see these benefits Bitcoin’s adoption will continue to rise. More and more fiat currencies from around the world will continue to be exchanged for Bitcoins. Since there’s a maximum supply of 21 million Bitcoins for the entire world, Bitcoin’s price will inevitably continue to rise over the next decade.

Marcus has worked for the better part of the past two decades as an IT Systems Administrator. Throughout his life he's been fascinated by finance and hopes the creation of cryptocurrency heralds a new era where banks, governments and centralized institutions lose their strangle-hold upon the citizenry's financial health and welfare.